"Intelligence" Scottish Investment Market - Quarterly Review December 2021 - Lismore Real Estate
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“Intelligence”
Scottish
Investment
Market
Quarterly Review
December 2021
WELCOME
A bit like the finish to the F1 season,
“Intelligence”
the 2021 investment market has
been a little “mad” or, at the very
least, a roller-coaster ride...
The year started with the optimism of a vaccine roll-out programme in the
offing and finished with our, beleaguered, Prime Minister making a state of the
nation “plea” for the public to get their boosters – you couldn’t make it up...
Yet, despite the ups and downs faced during the year, the Scottish
investment market has faired surprisingly well with volumes up 24% on
2020, the wall of overseas capital chasing stock continuing and pricing
reaching pre-pandemic levels in certain sectors (specifically foodstores,
logistics and retail warehousing). However, the picture is not all rosy and
challenges remain for significant parts of in-town retail and investors
continue to grapple with offices, other than those of the very best quality or
which can be adapted to meet more challenging ESG credentials.
One part of the market which was initially hit hard but which rebounded (in
part) very strongly during 2021 was operational real estate, namely PBSA,
management contract hotels and serviced apartments. Loosely bracketed as
alternatives. The best assets, well located, have seen occupancy levels rebound
strongly and while net operating income might not quite be back to pre-
pandemic levels, investor interest has been pricked by their resilient qualities.
With this backdrop, in addition to our usual market analysis, our focus this
review is twofold - (1) looking forward to 2022, how will the market shape-
up and (2) looking at the “alternatives” market. To help shape our thinking,
we are pleased to share a question and answer piece with James Dunne,
Head of UK Transactions at abrdn.
Whether you were a Verstappen or a Hamilton fan – the F1 season was
nothing if not exciting. Let’s hope for an equally interesting 2022…
02 Lismore | Quarterly Review | December 2021
Market Pricing
overview.
• Foodstores, convenience
stores and distribution have
seen the strongest sharpening of yields,
anywhere between 50-100bps over
the quarter.
• Core-plus opportunities have been
Key themes Transaction volumes relatively limited but we are seeing a
softening of pricing around Grade B offices
• Operational alternatives bounce • We saw a strong Q4 with c£520m as investors come to terms with increasing
back – The strongest hotels and PBSA traded, ending up 27% on Q4 2020. levels of CAPEX and ESG challenges.
schemes have seen a better than • The only sector really offering “value-add”
expected return of occupancy levels, • Q4 volumes were 22% below the 5
year average (£666m), but worth pricing is in the shopping centre market
while the BTR sector continues to prove where risk remains but the best assets are
resilient and attractive to an increasing noting this included two stellar years
in 2017 and 2018. starting to find their level, between 50-
number of investors. 90% discount to purchase levels.
• Prime shopping centres finding their • Total volumes for 2021 will end up at
pricing level – The sale of Silverburn close to c£1.345bn, an increase of
in Glasgow is the first sale of a prime 24% on the total for 2020.
centre in Scotland, pricing at c50%
discount but highlights that appetite
remains for the best re-priced quality Investor activity
assets.
Sale volumes • UK institutional activity remains
• A wave of North American investment very focused on longer
– Across various sectors including retail £1.4B income defensive stock including retail
warehousing, offices and industrial, the warehousing and distribution, although
most active investor pool has come £1.2B Quarter 4 we have seen a welcome return by a UK
from the US. Scotland continues to see 5 year average institution to the Edinburgh office market,
more than its fair share of global capital. the first time in a number of years.
£1.0B
• Inflationary spike – In December 2021, • Overseas investors continue to target
inflation rose to 5.1%, its highest level Scotland (Edinburgh in particular) with
£800M
for 10 years. The cost of living is rising buyers from The Middle East and mainland
significantly but good news for those Europe all remaining active but the
investors holding assets with inflationary £600M overwhelming weight of capital has been
rental indexation. from North America.
• Development stalling — Q4 has seen £400M • The level of distressed selling continues
the construction sector shrink by 1.8% to be very limited hence the more
due to a shortage of raw materials £200M
opportunistic (private equity backed)
compounded by upward pressure buyers are looking further up the risk
on prices. As a result, developers are curve, either direct development, vacant
having to re-visit rental levels/lease £0 buildings or shopping centres.
terms to ensure appraisals are viable. 17 18 19 20 21
03 Lismore | Quarterly Review | December 2021
Key recent transactions.
Q4 saw some interesting themes and significant
transactions which we have highlighted below:
Food Stores: Prime Warehousing:
“Overseas capital, with attractive “Best in class ESG industrial attracts premium
debt on offer, is chasing prime pricing off market”
food stores”
Scania, Condor Glen, Eurocentral
Sainsbury’s, Inglis Green Road,
Edinburgh • Vendor — West Ranga Property Group
• Vendor — Inglis Property LLP • Purchaser — DVS Property Limited
• Purchaser — Urbium Capital • Let to Scania (Great Britain Limited)
Partners LLP
• Price/Yield — £10.725m / 4.50%
• Let to Sainsbury’s Supermarket
Limited • Date — December 2021
• Price/Yield — £32.2m / 4.60%
• Date — December 2021
Office:
Multi-let Industrial:
“A UK fund buys prime Edinburgh
“Prime industrial portfolios office”
continue to attract competition Exchange Place One, 1 Semple Street,
from specialist platforms” Edinburgh
The Caesar Portfolio, Edinburgh & • Vendor — Macquarie Asset
Bathgate Management
• Vendor — J Smart & Co • Purchaser — CBRE IM
• Purchaser – Ribston • Let to Blackrock, Hymans Robertson,
Cameron Hume, Cundalls, Evans
• Multi-let Cycles
• Price/Yield — Confidential • Price/Yield — £58m / 5.06%
• Date — December 2021 • Date — December 2021
04 Lismore | Quarterly Review | December 2021
The investor view on
With a seemingly brighter 2022 looming, we are keen to
understand if investors will see this as an opportunity, what sectors
will see best performance and what factors will drive investment
likely trends in 2022.
decisions. To assist with this, we have engaged with a wide range
of investors (funds, property companies, investment managers UK
& overseas and private equity) asking the following questions:
1) In 2022 are you likely to be:
a net buyer, neutral or a net seller? 2) Which will be the top performing sector in 2022:
food stores, retail warehousing, distribution, 3) Which of the following do you see having the
greatest impact on your investment decisions over
multi-let industrials, alternatives or office? the next 12 months (list 1 to 4): ESG, hitting return
criteria, debt availability/terms or stock availability.
Net seller Offices Food stores
0%
Alternatives Debt
availability/
10% 6% terms 0%
ESG
13% 19%
Retail
Neutral warehousing
Hitting
21% 36% Multi-let return criteria
industrial 50%
Net Buyer 17% Stock
69% availability
Distribution 31%
28%
• A significant majority (69%) of respondents • Unsurprisingly the top 3 performing sectors are expected to be retail • Hitting return criteria (50%) was selected as having the
expect to be net buyers in 2022, with 21% warehousing, distribution and multi-let industrials. greatest impact on investment decisions in 2022.
neutral. A small number of respondents
commented that macroeconomic factors • Of more interest is the extent to which retail warehousing (36%) • Stock availability was identified as having a significant
would likely play a role in dictating strategy. is supported ahead of distribution (28%) and multi-let industrial impact (31%) of respondents which reinforces our view
(17%). Although prime yields have begun to harden, retail that there will continue to be a significant weight of
• Investment managers and property companies warehousing does still appear to still offer some good value given money chasing limited (quality) stock and for certain
look to be most acquisitive with 83% and 73% the rapidly changing retail market and strong occupational demand. sectors, yields will see further sharpening.
respectively anticipating they will be net buyers
in 2022. Just over 50% of funds and private • In comparison to our survey in 2020, support for food stores has • A meaningful number (19%) placed ESG at the top of
equity respondents expect to be net buyers. fallen slightly, down from 12.5% to 6%. Perhaps an acknowledgment their criteria, spread fairly evenly across the buyer pool.
that a lot of the performance in the sector has come during 2021. This has risen significantly since our findings this time
• Only 10% of respondents expect to be net The office sector received the poorest backing with no respondents last year.
sellers, suggesting another year of limited stock expecting the sector to perform strongest in 2022. Concerns over
and inevitable pricing pressures for the best CAPEX requirements and future working habits being mentioned as
opportunities. headwinds for the sector.
05 Lismore | Quarterly Review | December 2021
An expert view on
What are some of the key benefits of owning traditional commercial sectors provides additional
alternatives and operational real estate to push factors into operational sectors.
institutional investors? And which have been the The growth of the BTR sector particularly in Scotland
favoured sectors?
operational real estate…
has been somewhat slower than elsewhere in
The breadth of the alternative sectors (I haven’t regional UK and London. Why do you think this is –
come up with a better name!) means that by and do you expect to see it pick up now?
not investing in them we are missing out on an As a house we have BTR exposure in Scotland and
increasingly significant part of the real estate it has performed very well for us. The opportunities
investment market. When you consider that a lot to invest in strong areas have been limited though
Recent Scottish investment activity: of these assets are underpinned by social need as competing land uses and a lack of an established
StayCity, Edinburgh (housing, wellbeing, education etc). then it almost professional and purpose built rental market has
seems nonsensical not to invest in these areas. The potentially deterred some developers from turning
Fixed lease aparthotel with 108 aparthotel rooms and 20
main hurdles have been the completely correct out purpose built rental product.
serviced apartments. 25 year lease to StayCity, £25m/5%.
resistance to buy in areas where we as investors
Maldron Hotel (Dalata), Glasgow do not have a proper understanding of the sector There has potentially been some reticence from
Fixed lease hotel with 300 beds on 35 year lease, and also the lack of asset structures that allow us other investors around the nuances in the statutory
to invest as institutional capital. The pandemic has residential framework in Scotland and uncertainty
£39.7m/4.4%.
highlighted the benefits of having a diversity of around political situations such as Brexit will have
Gilmore Place, Edinburgh added to this.
income and sectors within a portfolio whether that
Student funding of 230 bed PBSA scheme, £29m/5.5%. I think these are short term issues though and I see
James Dunne be additional commercial areas or within the social
Head of UK Transactions, Lochrin Basin, Edinburgh infrastructure space. no reason why there should not be a flourishing BTR
Real Estate, abrdn Direct let BTR with 113 units (191 beds), £27.5m/4.75%. One of our preferred target areas has been the market in the major Scottish cities and towns in line
extended stay market (aparthotels, serviced with the maturation of the market across the rest of
One of the “mega-trends” we’ve seen in the real The alternatives sector (particularly operational apartments). This was a growing market before the the UK.
estate market in recent years has been the change real estate) appears to be bouncing back relatively pandemic given the obvious attraction of staying in Many investors tend to make investment into
in attitude from providing space as a product, to strongly as Covid restrictions have eased. Has this a small apartment with a kitchen and living area if operational real estate with a specialist partner. Do
embracing space as a service. In your view, which surprised you and is it isolated to certain sectors you are away for a few days, weeks or months. They you see this trend continuing, or will technology and
sectors of the market have been quickest to adapt and locations only? also provide a practical alternative for family’s and on-boarding of “in-house” expertise see institutional
to this, and which are lagging behind? The catch all categorisation of ‘alternative’ or ‘other’ groups on leisure stays. The lower cost of running the investors in particular become more hands-on in the
I believe we are still in the early stages of this is increasingly less relevant. The breadth of sectors operations means they operator can run efficiently and management of their operational portfolios?
transformation. The way that property investments are and types of real estate that this covers means that this counterbalances the larger space requirements. In order to invest we need to have the confidence
owned and valued can make it harder for landlords coupled with the increased mainstream investment The ability to pivot from more lucrative short term that we understand the asset and the market that
to adapt their strategies and customer relationships into a lot of these areas, I don’t think we can or stays to a longer term model which provides certainty we are investing in. As investors start to broaden
to provide the flexibility and service that a growing should be viewing this as a single sector. of income and was in demand during lockdowns their horizons both into the alternative sectors and
number of tenants are demanding. Equally, users of meant that the sector showed very strong resilience more operational real estate it is prudent to have a
The hotel sector is an example of where we have throughout the worst of the pandemic disruption
space need to appreciate there is a balance to that seen a really interesting pattern in durability. specialist on board to plug any gaps in knowledge
landlord and tenant relationship and the property and therefore a strong rationale to invest both for the and experience. With the more ‘hands on’ and
We are all guilty of overestimating the worst protection in the downside but also the predicted
owner needs to be able to generate returns and and underestimating the speed of bounce back direct risk / reward nature of operational real estate,
protect the long term value of their asset. performance in a more normal market. which may well involve wider skill sets than those
whenever there is a crisis or downturn. It is hard
The most visible area where we have seen an to displace yourself from the current market and According to INREV, capital allocations to stand- which a traditional investor may possess this need is
ongoing shift change to a more service real estate mindset when you are in the midst of these events alone operational real estate currently stand at even more heightened.
environment is the office sector. As with many (the same can be said for a rampant bull market). 11.8%. Do you see this growing over the next By externalising some of the operational side of the
trends, this is being accelerated by the pandemic With that said, I think the speed of the hotel 5 years? Which segments of the market will running of an asset it also gives an investor the ability
and it is an area that could continue to develop recovery has surprised even the most seasoned of investors be targeting and why? to choose and switch to best in class partners and
rapidly with the long term return to the office. investors and hoteliers. What we have seen though I think it is inevitable that we will see this allocation nimbly take advantage of any evolution of either the
The retail sector is one that will have to continue is that the recovery has been very narrow and increase. The requirement for significant amounts market or technology.
to adapt if it is to stay relevant. The demands of driven by the best assets and the best locations. of residential accommodation, the increased
consumers to have variety, immediacy and evolution Whilst we have seen record occupancy and room understanding of the operational areas and
of choice means that retailers have to be more rates in some hotels and locations, this has not been requirement for a large quantum of funding into the
flexible and that applies to the real estate they are replicated across the whole sector. As we hopefully social infrastructure areas all provide compelling
in. The more experiential retail, most likely digitally continue to emerge from the restrictions of the pull factors for investors. This is also against the
enabled, should develop and lead a partial, targeted pandemic then we should see a wider recovery but backdrop of a shrinking retail market, a low yielding
recovery in the sector. I think the trend for the best assets to significantly industrial sector and a collective uncertainty on how
outperform the market will continue. the office sector will evolve. This disruption in the
06 Lismore | Quarterly Review | December 2021
‘Our view’ on
what to look out
for during 2022…
Off market acquisitions to the fore Increasing weight of overseas capital investing Aberdeen to see improved investor activity? The leisure market will be one of the most
in the Scottish market interesting during 2022
As our investor survey illustrates, 2022 will continue Having had a number of thin years in terms
to see more buyers than sellers for the best stock. Despite the threat of further travel restrictions of investment volumes, there are signs that City centre bars and restaurants have been
Hence we see “off-market” opportunities as being and interest rate rises on the horizon, the Scottish investors are starting to re-visit the Aberdeen particularly badly hit during the pandemic
particularly attractive to investors and believe that market continues to be seen as an attractive and market. 2021 has witnessed increasing demand but the strongest operators had seen a strong
buyers will be prepared to pay premium pricing safe destination for overseas capital. Investors for quality assets in the retail warehousing bounce-back as restrictions have eased. Stock
to avoid competition. A number of high-profile from the US, mainland Europe and Middle East and industrial sectors, which we anticipate selection will be even more important but with
transactions have completed off-market (or have been particularly active this year and we see continuing into 2022. such uncertainty in the market, there will be
selective marketing) during 2021 - Exchange this continuing unabated into 2022. value to be had, albeit it may take some time to
The office market remains more challenging but
Place 1 in Edinburgh and Silverburn in Glasgow as see the calmer waters ahead.
The increasing US investor activity is particularly with the oil price looking stable at c$70-$80 per
examples. This trend will continue.
interesting. A number have deep pockets and barrel, the occupational market is showing early Out of town, the picture is quite different with
Mind the office ESG gap… we see their market share increasing further signs of improvement and for the right building, roadside and drive-thru markets absolutely
during 2022. with quality tenant(s) and properly priced then thriving. With many new entrants now rolling out
We will see the gap between prime (best in class
we anticipate that the more opportunistic buyers their expansion programmes (including Greggs,
ESG) yields and the rest of the market widen. As Glasgow to overtake Edinburgh in office
could be tempted by the attractive cash on cash Subway, Leon, Wendys and Popeye Chicken) in
occupiers and investors become ever more exacting investment volumes
returns available. addition to the active existing operators (including
in their ESG requirements, the few buildings that
Edinburgh has had a strong run of transactions Starbucks, Costa and Tim Hortons), there will be
meet the very best standard will command premium
during 2021 (£282m traded). We see Glasgow very significant rental growth coming through
pricing and could be as much as 25-50bps sharper
fighting back during 2022 and with a number of during 2022. On the back of this, long and strong
than the next tier.
high-profile new developments completing and roadside stock will see a renewed level of interest
We have seen the gap already appear in the office letting up, volumes are likely to rise significantly. and sharpening of yields.
market but it is now becoming a feature in other The potential sale of 177 Bothwell Street is likely
sectors including distribution and retail warehousing. to set a new benchmark for prime office yields,
If the relevant sustainability improvements are not further highlighting our view that best in class
made in the short term, the prospect of less liquid (ESG focused) developments will command
assets becomes a real threat in the longer term. premium pricing.
07 Lismore | Quarterly Review | December 2021
“Intelligence”
Scottish Investment Market
Quarterly Review — December 2021
For more “Intelligence” contact:
Simon Cusiter Colin Finlayson Chris Macfarlane Richard Mackie Chris Thornton
T 0131 202 4561 T 0131 202 4562 T 0131 202 4563 T 0131 202 4564 T 0131 202 4565
M 07815 135222 M 07739 299530 M 07711 851700 M 07966 396480 M 07843 975345
simon.cusiter@lismore-re.com colin.finlayson@lismore-re.com chris.macfarlane@lismore-re.com richard.mackie@lismore-re.com chris.thornton@lismore-re.com
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